Bottom of the Barrel: An Updated Outlook for Residual Fuel Oil

About "Bottom of the Barrel"

This study expands on, and brings up-to-date, a similar PIRA study issued in 2007. Although the broad outlook trends addressed in the 2007 study generally are still true, much has changed since then: the global recession and its aftermath, the IMO's approval of bunker sulfur regulations, the rise of oil production from shale, the increase in world oil prices — to name a few. These changes, along with a broad-based interest by PIRA's clients, led to this new updated, expanded study.

"Bottom of the Barrel 2012" shows how a detailed and nuanced look at the underlying trends builds up to robust conclusions for the future. The study answers these important questions:

To what extent will the global balances for residuum tighten, and what will be the new marginal refining steps that drive margins and crude differentials?

How will bunker fuels sulfur regulations impact demand and price? Will scrubber technology be a major factor?

How are the balances for low-sulfur expected to be different from high-sulfur fuel oil?

What are the changes in trade patterns and arbitrage relationships that can be expected?

How will fuel oil blending components change in different regions?

What will be the impact on light-heavy product prices, low sulfur-high sulfur fuel oil prices, and light-heavy crude differentials?

What would be the impact if the global economy grows more slowly than expected in the Reference Case? Or if it grows more robustly?

Will the changes in heavy product demand, supply, and refining be fundamentally different in the developing world versus the mature industrialized world?

Key Features of “Bottom of the Barrel”

In 2007, PIRA issued a “Bottom of the Barrel” study that made some bold predictions — especially about sharply narrower light-heavy spreads — that ultimately proved to be very close to the mark. Now, PIRA has created an updated and expanded outlook for residual fuel oil and the rest of the “bottom of the barrel.”

How 2012’s Version Differs from 2007:

The global recession, rapidly growing shale crude production, and recent developments in the Middle East, Japan, and elsewhere are assessed.

Demand forecasts for fuel oil, asphalt, lubes, and petcoke are updated and extended to 2025.

New demand scenarios will be developed.

A detailed look at the impact of recently enacted bunker specification regulations.

The impact of increasing conversion capacity and high absolute price levels.

A Comprehensive Written Report

In addition to a robust database and a recorded slide presentation with audio accompaniment, “Bottom of the Barrel” features an extremely insightful and comprehensive written report. Below is its table of contents.

What Do Study Subscribers Receive

Companies purchasing the study are entitled to have three users to each of the following deliverables (licensing options are available to add extra users):

Written Report

Spells out the findings of the study and the bases underlying those results, and provides a discussion of the key uncertainties that impact the major findings. Approximately 200 pages long, the report includes an executive summary, as well as detailed discussion and illustrative charts on: Demand, Supply, Quality, Price, Trade, and Alternative Scenarios.

Online Database

A comprehensive database providing historical data back through 1995 and forecasts through 2025 in Excel spreadsheets for:

Price forecasts, both absolute and relative to crude/products, by region and quality

Study Presentation (recorded April 2012)

A slide show with accompanying audio — 3 hours long — that discusses the study's key findings and their implications.

Why the Time Is Right for this Study

A Fresh Look at Demand Trends

The long historical decline in fuel oil demand is expected to level off or even grow in some scenarios. Substitution to other fuels for power generation in the OECD, FSU, and other industrialized countries is nearing practical minimums. In the developing world, further growth in stationary uses is still likely, but not broadly based. Most expansions are concentrated in oil-exporting countries and in rapidly developing countries struggling to meet electricity demand growth.

Bunker demand, on the other hand, continues to grow robustly as the vessel fleet grows to meet expanding trade, and it will represent an increasing share of total fuel oil demand. However, tighter bunker sulfur specifications may drive demand further to low sulfur residual or even distillate based fuels, although the manner and schedule for implementation is still uncertain.

"Bottom of the Barrel 2012" examines demand trends for power generation, industrial use, bunkers, and asphalt/lubes/other specialties. Regional/country forecasts are included. Factors influencing these trends — including policy, substitution due to competitive prices, efficiency improvements, quality requirements, and the potential use of scrubbers for shipping — are also addressed. Demand scenarios that test the impact for a range of possible economic and regulatory factors provide bounds around PIRA’s Reference Case forecast.

A New Assessment for Fuel Oil Supply

With demand for light products growing much more rapidly than that for fuel oil, ongoing additions to fuel oil conversion capacity are required to balance supply and demand. Over the last few years, capacity additions have rapidly increased, and now exceed current requirements. This surge will continue for the next few years and will tighten straight run fuel oil balances and tend to keep light-heavy product price spreads narrow.

Rapidly Changing Price Relationships

With these changes in demand trends and refining capacity will come dramatic changes in pricing relationships. The study addresses these impacts. Changes in residual fuel oil prices relative to other products and crude are quantified. Quality and regional differences are described.

Who Will Benefit from this Study

The stakes are high when it comes to making decisions regarding future residual fuel oil/other heavy product supply, demand, and pricing. "Bottom of the Barrel: An Updated Outlook for Residual Fuel Oil, 2012 Edition" can help market participants keep ahead of the competition through a better understanding of the future interplay between regional residuum balances, regional pricing for different qualities, inter-regional trade, and the impact of these factors on refining margins. The following market participants will all benefit from this study:

Refiners need to plan capacity changes based on the outlook for product demand, feedstock supply, and relative pricing. By providing a firm basis in evaluating future changes in these factors, which define refinery fuel oil conversion margins, the study will help refiners evaluate the future profitability for different refinery configurations.

Shipping companies know that their single largest expense is for bunker fuel, and they face uncertainty both on its price and regulations on quality. Bottom of the Barrel will provide a residual fuel oil price basis under different demand/regulatory scenarios.

Policy makers need timely insight into how proposed changes in product quality regulations will affect supply, demand, price, and industry profitability. This study will enable them to better evaluate the impact of future regulatory changes.

Electric utilities and other end-users constantly consider how changing fuel oil price dynamics will influence service choices and future capacity decisions. The study will make end-users better equipped to adapt to supply and price shifts, and help new project developers make more effective evaluations of fuel supply options and project viability.

Financial institutions must make sound evaluations of how changing market conditions will affect the economics and financing of new refining and marketing ventures. This study will allow for more informed decision-making on potential projects.

Study Fees and Options

"Bottom of the Barrel: An Updated Outlook for Residual Fuel Oil, 2012 Edition" can be purchased by both PIRA retainer clients as well as non-clients. Existing PIRA retainer clients receive a reduced price. Also, buyers of PIRA's 2007 study "Bottom of the Barrel: The Future for Residual Fuel Oil" receive an additional discount.

Additional users (beyond three),extra report copies and database passwords can also be purchased.